/ November 04 / Weekly Preview
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Monday:
N/A
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Tuesday:
ISM Services PMI (53.8 exp.)
Presidential Election
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Wednesday:
N/A
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Thursday:
PPI MoM
Initial Jobless Claims
Fed Interest Rate Decision
Fed Chair Powell Speech
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Friday:
Retail Sales MoM
NY Empire State Manufacturing Index
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Monday:
Palantir Technologies PLTR
Cirrus Logic CRUS
Diamondback Energy FANG
NXP Semiconductors NXPI
Vertex Pharmaceuticals VRTX
Chemours CC
DigitalOcean DOCN
Frontdoor FTDR
Zoetis ZTS
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Tuesday:
Super Micro Computer SMCI
Archer-Daniels-Midland ADM
Builders FirstSource BLDR
Gartner IT
Yum! Brands YUM
Devon Energy DVN
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Wednesday:
Arm Holdings ARM
Qualcomm QCOM
Take-Two Interactive Software TTWO
Albemarle ALB
Zillow ZG
AMC Entertainment AMC
AppLovin APP
Bumble BMBL
Duolingo DUOL
e.l.f. Beauty ELF
Fair Isaac FICO
HubSpot HUBS
Celsius CELH
MarketAxess MKTX
Teva Pharmaceutical Industries TEVA
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Thursday:
Ferrari RACE
DraftKings DKNG
Canada Goose GOOS
Ralph Lauren RL
Datadog DDOG
Affirm AFRM
Arista Networks ANET
Block SQ
Capri Holdings CPRG
Fortinet FTNT
Pinterest PINS
Sprout Social SPT
Unity Software U
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Friday:
N/A
Decision Time for the U.S. Electorate and The Fed
Over the last week, we discussed the consolidation pattern the market was going through and the re-test of support at the 50-DMA. While mostly Q3 earnings-related, the overall de-risking is not surprising ahead of two major catalysts this week: the U.S. Presidential Election tomorrow and the Fed’s interest rate decision on Thursday.
As of Friday, about 70% of S&P 500 corporations have reported earnings. Nvidia (NVDA), which will report in November, is a notable straggler. Overall, we have enough info to draw some conclusions about this quarter’s health and earnings will provide less of an impact to the broad market going forward.
Q3 Earnings Season was broadly positive, with 75% of companies reporting a positive EPS surprise and 60% of companies reporting a revenue beat. Such is not surprising given the sharp reduction in estimates heading into earnings season.
Despite the high earnings beat rate, revenue growth has declined over the past 3 years and remains under pressure. Since revenue happens at the “top-line of the income statement” and directly reflects consumer activity, the economy may be weaker than the headlines suggest.
To get to the “bottom line of the income statement” (EPS) all costs of goods sold and operating expenses must be subtracted. While earnings per share have been able to keep up with the longer term growth trend, the annual rate of change has declined, as shown in the chart below. In our framework, the annual rate of change in EPS determines the trading direction (CAGR slope) of a stock. Fundamentally speaking, we should expect the market’s growth rate to slow if this trend continues.
As we wrote many times, there are limits to how much higher markets can go without a commensurate increase in earnings. Such an advance stretches the valuations of companies into some of the highest multiples recorded during the last cycle. Currently, the market has the highest valuations since 2021 and 1999, and both of these periods have seen major reversals.
Yet history shows that once a bull market goes on uninterrupted for 2 years, more gains seem to follow — as Carson Research points out:
For now, absolutely nobody cares about fundamentals, and all eyes are primarily focused on the US Presidential Election. The bout between Donald Trump and Kamala Harris has heightened uncertainty across financial markets. Both candidates have dramatically different policies for the economy, so stakes are high for investors. Historically, markets experienced increased volatility ahead of election events. After the ballots are cast on election day, stocks tend to rally, as the chart below shows.
However, not all financial market outcomes have been positive after the elections. In the instance of a contested democratic process, like it was the case in 2000 between Al Gore and George Bush, the market responded negatively:
The risk surrounding tomorrow’s event is not a victory by either candidate. It’s the risk of a contested election, with both parties claiming victory and a long and drawn out process of determining a winner. Greg Valliere, an expert on Washington issues, offers the following analysis:
[…] legions of lawyers are already plotting the appeals process, which could last into winter. There are three likely stages:
1. Within hours after the polls close, there will be inevitable calls for recounts. We anticipate about a dozen calls for recounts in the presidential race, with many more appeals in Congressional elections.
2 . There will be virtually instant allegations of irregularities — ballot boxes stuffed, dead people who voted, the usual stuff, which will be exaggerated on the internet.
3. MOST IMPORTANT, the lawyers will unleash an avalanche of lawsuits, claiming fraud. These challenges may drag on into December.
A challenge could eventually wind up in the House. The Constitution stipulates that a new president must be sworn in by noon on Jan. 20. If this winds through the appeals process, one fact will stand out. The VERY CONSERVATIVE JUDICIARY, largely installed by Trump and Mitch McConnell, will call the shots. The Supreme Court — 6-to-3 conservative — unlimitedly may decide the outcome.
However, should these elections go down the constitutional path, the potential for civic unrest and a deeper political divide is not insignificant.
Given this background, it comes as no surprise to see the market correct during the past week. The good news is that support at the 50-DMA managed to hold by the end of the week, and dark pools have mostly been in accumulation mode. For now, the backdrop remains bullish and momentum should restart into year-end. In other words, this remains an opportunity to buy the dip.
Our Trading Strategy
With post-election returns historically positive, a seasonal buy-signal and an impending inflow of corporate buybacks, markets should see a lift into year end:
However, risks are risks and nothing can be taken for granted in this market. That is why our Portfolio Management process remains crucial in the overall asset allocation strategy and position selection of our live portfolio.
For the moment, we would argue that there’s “nothing special to do”, at least not regarding to the election event itself. Regardless of who will win the Presidential race, investors will return to assessing the fundamentals that really matter: interest rates, inflation and economic growth.
The Fed will announce its decision on the benchmark lending rate on Thursday, with traders pricing in a 98% probability for a 25 bps cut. On that note, today’s situation where the 10-year yield rose so much following the first rate cut of the cycle is unprecedented. On one hand, a rising 10-year yield translates into confidence for a healthy economy. On the other, it also implies rising inflation expectations.
The bond market will also be impacted by the election outcome. In our view, neither candidate has a plan to realistically balance the budget (Javier Milei style), so it’s truly up to the Fed to set the tone for treasuries going forward. Our view is that sooner or later, yields will retrace at least to the rate of economic growth, now at around 2.8%.
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